Trading Stock Options
The Stock Market is still a very profitable portal even in this stage of our economy. Although trading stocks generally means taking a risk on a company in hopes that it prevails and the stock value increases, trading stock options can be profitable even if the company doesn’t prevail.
Here are a few basic things to know about trading stock options -
Option Basics
All trading stock options are simply rights. They are the right to buy or sell a certain number of shares by a certain time for a certain price. These terms are outlined in a contract that a broker and a trader must execute together.
There are call options and put options. Call options are a contract to purchase 100 shares of a stock before an expiration date. A put option allows trading or selling of these shares or contracts in an agreed amount prior to expiration. When a trader opts to use both call and put options this is called a double option. Because no one can guarantee if the share price will go up or down by the expiration date, it gives the trader great leeway to trade the stocks as he wishes.
A strike price is listed in the contract. This is the amount that the trader has agreed to pay at the expiration date. This price is much lower than the actual price of 100 shares because of the leverage a stock option possesses. A trader has until the expiration date to either purchase the shares or sell them. This is not to be confused with the premium. A premium is the amount that the trader must pay for the option itself. This is typically paid upfront and nonrefundable. If a trader decides to exercise his option that means he chooses to buy the underlying stock for which the option was created for.
Option Trading Exchanges
Trading stock options do not occur in the same exchanges as trading stock. Trading stock takes place in 3 exchanges, and trading options occurs in 5 exchanges, different than the 3 stock exchanges. You can find the same stock option in all 5 of the exchanges but you can only find a stock listed in one of it’s 3 exchanges.
Trading stock options isn’t an obligation, it’s a right. You can choose to do a number of things with the contract. The security of this transaction comes from the underlying price. Even if the share’s value decreases, a stock option trader can still profit.
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